Business

Oil prices rise as Libyan conflict intensifies

  • 2 March 2011
  • From the section Business

Oil prices have moved closer to recent highs as conflict in Libya intensified.

Brent crude futures rose $2.40 to almost $118 a barrel, before falling back below $116.50, while US light, sweet crude rose $2.75 to $102.40.

The increases followed news of an air strike in Libya near an oil terminal in the east of the country.

Libya's top oil official, Shokri Ghanem, chairman of the National Oil Corporation, also said prices could reach "$130 or more in the next month".

He said that the country's usual output of 1.6 billion barrels-per-day had been reduced to less than 750,000 barrels by the conflict.

Saudi Arabia previously said it is covering all of the extra demand not met by Libya.

Targeting oil facilities?

The Libyan government has fought back against the revolt in recent days, raising fears the country could be in for a more protracted conflict.

There are also worries that the Libyan air force may strike oil facilities in the rebel-held east, with the idea of a no-fly zone still being debated.

The regime's planes bombed locations close to oil infrastructure on Wednesday as part of a failed attempt to retake Brega in the east of the country.

"It looks like an attack fairly close to what is one of Libya's largest storage and export terminals," said Andy Lebow, a trader at MF Global in New York.

"It's hard to say if the Libyan government is trying to target oil infrastructure in the east or whether they're just targeting rebel-held areas, but the market's reacting to this threat either way."

'Short-term price spikes'

Meanwhile, the boss of Shell said oil-producing countries would do what was necessary to ensure stable prices.

Rebel gunman atop a car headed for Brega
There are fears that Libya may be in for a more protracted conflict than previously thought

"You will see short-term price spikes but in the longer term, I think Opec have made it very clear how they will operate," Shell chief executive Peter Voser said.

But the higher oil price is already raising concerns in some sectors of the economy.

The International Air Transport Association (Iata) warned on Wednesday that airline profits will suffer, and reduced its 2011 profits forecast for the global industry by $500m to $8.6bn (£5.3bn).

The Organisation of Petroleum Exporting Countries (Opec) is watching the situation closely, but does not intend to call an emergency meeting yet, according to Wilson Pastor, oil minister of Ecuador, an Opec member.

However, Mr Pastor said any rise in oil prices above $120 would have an "important" effect on the world economy.

The price of gold, which rises in times of uncertainty, has reached another record high of $1,440.10 an ounce.

It has been rising steadily for the past month as unrest in the Middle East has continued.

Negative news flow

Stock markets across the Middle East fell again on Wednesday amid fears that civil unrest is spreading and could affect the region's larger economies.

Saudi Arabia's share market, the region's largest, fell 3.9%, following a 6.8% slide on Tuesday.

Meanwhile, Qatar's stock index dropped 3.6% on Wednesday, Kuwait fell 2.6%, and Dubai 3.5%, sparking falls in European markets.

"The news flow is negative. The uncertainty is there," said an analyst at Dubai-based Al Mal Capital.

The cost of insuring Saudi Arabia's sovereign debt against default - an indicator of risk - rose 7 basis points to 1.43%.

Saudi's Tadawul share index has fallen almost 20% in the last two-and-a-half weeks, even though the kingdom's main revenue earner - oil - has risen in price.

Protesters in Oman
Investors are concerned that unrest in Oman and Bahrain may spread to Saudi Arabia

Investors are concerned that heightened tension in the region will fuel further rises in oil prices and threaten the fragile global economic recovery.

There are also fears that the Saudi royal family may be the next to face anti-government protests, with a "day of rage" there called for 11 March.

'Ripple effect'

"We are seeing a significant elevation in risk premiums, with investors revising their expectations for the region," said Hashem Montasser, managing partner at Frontlane Capital, a Dubai-based asset management firm.

He told the Reuters news agency: "Concerns about unrest in North Africa have now migrated to the Gulf, albeit in the smaller countries like Oman and Bahrain.

"The fear is that there will be a ripple effect into other GCC (Gulf) countries, so there's a lot of panic selling."

CMC Markets analyst Michael Hewson warned that the price of Brent crude could hit $120 a barrel within the next few days.

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